As alarms have sounded that we’re heading into the deepest global recession of the modern era, Egypt has been (just barely) exempt from the (long) list of countries the IMF and other international organizations think will see their economies contract this year. The European Bank for Reconstruction and Development (EBRD) is no exception — its latest Regional Economic Prospects report sees Egypt doing better than any other country in the region this year, and achieving growth rates second only to Lebanon in 2021.
We sat down with Heike Harmgart, the EBRD’s managing director for the southern and eastern Mediterranean (SEMED) region to discuss Egypt’s post-covid economy, what policymakers can do to stimulate growth, and the EBRD’s investment plans. Edited excerpts from our conversation:
Enterprise: What do you think Egypt needs to do to maintain the relatively positive economic outlook, and what should happen for us to exceed expectations?
Heike Harmgart: Egypt will be severely affected by the covid-19 outbreak, as is the case with all countries we assess. This really shows how interconnected our world is. Egypt has entered the pandemic crisis from a point of strength, after achieving high economic growth in 2019, and it is the only country in the MENA region that will not endure a recession in 2020. We think Egypt will then rebound quite sharply in 2021. That outlook shows the success of the already-enacted macroeconomic reforms and the resilience of the Egyptian economy.
Now, policymakers need to think about how to ensure that you end up in the best possible scenario at the end of this crisis. But the catch is that all scenarios are globally interdependent, so how Egypt or any other single country will perform economically will depend significantly on what other countries are doing, even with the best individual response in place.
For example, some scenarios we've been running had different assumptions for tourism, which is a very important sector for Egypt. Obviously, tourism rebounding in spring 2021 would be much better than recovery in summer or fall 2021. But tourism recovery depends on a number of global factors, including how testing is incorporated in the travel process, and the policies set in place by the countries from which tourists are coming to Egypt. At what point will they reopen their borders and have global or bilateral agreements to resume tourism? The sector will take time to recover regardless, but a key policy to pursue is setting high-quality hygiene standards at hotels and tourism sites, and extensive testing and tracing. That’s the only thing Egypt can do itself.
Other key contributors to Egypt’s economy that unfortunately isn’t under the control of politicians are remittances and revenues from the Suez Canal, which have been hard hit. We do hope that global trade will resume strongly, and even if some global value chains become shorter, the Suez Canal will remain one of the most vital trade routes globally.
Egypt needs to focus now on continuing to ensure that the health system can cope with the health part of the crisis. There are other countries that have struggled immensely, and the cost is paid by both the affected and the healthy parts of the population. So I think that the key here is testing, testing, testing, and contact tracing, followed by quarantine.
We also believe it’s critical to make sure that domestic investment and domestic demand remains strong. The Central Bank of Egypt has been giving banks liquidity to on-lend to SMEs, and government investments in vital infrastructure will form the base for a more resilient and faster economic rebound.
From a legislative perspective, anything that gives the private sector more oxygen and space to breathe would be helpful in this crisis. The initial phase of recovery will require significant dependence on the private sector, so it is important at this time to ensure that the sector is resilient and can innovate. This is not the time to over-regulate or make processes like license applications cumbersome — this is a golden window to reduce bureaucracy and ensure that domestic investment can be maintained in these difficult times. This doesn’t just apply to Egypt; it’s a global phenomenon and all countries should look at how to simplify doing business.
One way to do that is to make business more digitally enabled. This is a huge opportunity for Egypt that shouldn’t be neglected. Many locally grown startups can be brought on to help with this transition. There's a huge upside there, and it would be a huge loss if we come out the other end with the same amount of bureaucracy.
E: What policies or reforms would you like to see the government enacting to improve the business climate, both now and a little further down the line?
HH: One thing that Egypt has done incredibly well in the past is embarking on a path to a green transition. There have been a few heat waves over the past weeks — this shows the excellent level of radiation for solar energy. Investments in solar and renewable energy are really paying off now, and this is the time to continue focusing on green innovation, which will be more resilient than other sectors — this crisis has already proven that. If you look at funds that are investing exclusively in the green economy, they’ve been doing much better than their competitors with more diversified portfolios. In 2019, the EBRD had two major investments in wind energy: EUR 75 mn in the Lekela wind project, and we invested another USD 60 mn in equity in Infinity.
There’s also a lot of scope to improve the capabilities of economic zones like the Suez Canal Economic Zone, where there are a lot of synergies between companies. Egypt is already in a good position there and should continue to invest.
Then there’s the fintech route. We've supported a lot of Egyptian startups, including ones focused on fintech, and there’s a vibrant scene of accelerators, venture startups, and tech-enabled startups through our Star Venture program. These need to be supported throughout the crisis to ensure the recovery and also to ensure that companies have flexibility in their delivery mode.
E: How has the pandemic changed the EBRD’s approach to investment?
HH: Generally, we have changed our approach to all our countries of operation because it's a global crisis. While we are open for our regular business, and I think our regular strategic priorities for Egypt, namely green and inclusive and integrated remain valid, there is a need to respond to this crisis immediately. Our board of directors swiftly approved a large global solidarity package of an initial EUR 1 bn followed by EUR 4 bn for the 38 economies where we invest. This package will allow a much faster approval for our existing clients, with a particular focus on the private sector. In the second phase, we’re also looking at faster approval for vital infrastructure.
E: What does that mean for Egypt?
HH: We want to further support SMEs that are the backbone of the Egyptian economy to help make them resilient and to enable their recovery. What they need during this period is urgent financing, and some of it is on a very small scale, through onlending via local banks. Egyptian banks asked us for additional liquidity to help lend to the real economy, particularly smaller exporters. In response, the Bank approved USD 850 mn of support to five Egyptian banks — QNB, the National Bank of Egypt, the National Bank of Kuwait, CIB, and Banque Misr — with USD 350 mn dedicated to trade-related activities. Egypt was one of the first countries to benefit from the solidarity package financing and the scale is probably one of the largest. The loan approval happened very quickly as these banks are our existing clients.
We’re also looking at how to support other clients like the Egyptian Electricity Holding Company on vital infrastructure projects, and other ways to support the real economy. There’s also a lot of demand for EBRD support from agribusiness companies and other industries such as the construction sector which is struggling at this point in time and needs extra liquidity to make sure they don't have to resort to layoffs and to keep the lights on. This shows how things are changing — we’re starting to get a lot more demand from the real economy directly, as opposed to demand being more concentrated among banks. This could take longer because we haven’t worked with some of them and the due diligence process takes time to understand their business models; nevertheless this is an area we’re looking at.
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